This document discusses sources of income and classification of income for tax purposes. It defines income as coming from sources within the Philippines, without, or partly within and partly without. It provides examples of how different types of income like dividends, income from services, rent, royalties, and gains from property sales are treated. The document also discusses what constitutes gross income, how income is distinguished from capital, receipts, and revenue, and provides examples of different types of compensation that are considered taxable income.

1. Chapter 4: Sources of
Income
Reporters: Lizzette Angelica A. Danan
Jessica Geane Manglicmot

2. Classification of Income as to Sources
• Income purely within;
• Income purely wihout;
• Income partly within and partly without;

3. Determination of Income as to Source
ITEMS OF INCOME
TEST OF SOURCE OF INCOME
DIVIDENDS
1) From domestic corporation
INCOME WITHIN
2) From foreign corporation (based on the
ratio of the gross income of the foreign
corporation for the preceding 3 years prior
to declaration of dividends derived from
Philippine sources)
Income within if ration is more than 85%
Phil. Gross Income x
Dividend
Total Gross Income
Income purely without if ratio is less than
50%
Income from services
Place of performance
Rent
Location of property
Royalties
Place of use of intangibles
Gain on sale of real property
Location of property
Gain on sale of personal property purchased
in one country and sold in another
Place of sale
Gain on sale of domestic shares
Income within
Income partly within and partly without if
ratio is between 50% and 85%

4. Income Partly from Sources within and Partly from Sources without
Examples: a) Income from transportation and other services rendered partly within and
partly without the Philippines.
b) Income from the sale of personal property produced in whole in or in part by the taxpayer
within and sold without the Philippines.
c) Income from sale of property producer, in whole or in part by the taxpayer without and
sold wihin the Philippines.
Computation of
income within when
independent factory
or production price
has not been
established
Taxable income x Value of property, within
2 Value of property, wihin and without xxx
Add:
Taxable income x Gross sales, within
2 Gross sales, within or without xxx
Income within
xxx

5. Computation of Taxable Income
Corporation
Gross Income
Less: Deductions
Taxable income
P xxx
xxx
P xxx
Individual
Gross income
Less: Deductions
P xxx
xxx
Pxxx
xxx
P xxx
Income before personal exemptions
Less: Personal exemption
Taxable income

6. Meaning of Income
Broad sense
Income means all wealth, which flows into
the taxpayer’s hands other than as a mere
return of capital
Judicial definition
Income is the gain derived from labor, from
capital, or from labor and capital, including
the gain derived from the sale or exchange of
capital asset.
Requisites of a taxable income
a) There must be gain;
b) The gain must be realized or received;
c) The gain must not be excluded by law
from taxation.

7. Gross Income
- Means all income from whatever source, including (but not limited to
the following items):
a) Compensation for services in whatever form paid, including but not
limited to fees, salaries, wages, commissions, and similar items;
b) Gross income derived from the conduct of trade or business or the
exercise of a profession;
c) Gains derived from dealings in property;
d) Interests;

8. e) Rent;
f) Royalties;
g) Dividends;
h) Annuities;
i) Prizes and winnings;
j) Pensions
k) Partner’s distributive share from the net income of the general
professional partnership.

9. Income Distinguished from other Items
• From capital
- Capital is the fund or property existing at one distinct time, while
income denotes a flow of weath during the definite period.
• From receipts
- Receipts have reference to all wealth that flows into the
taxpayer, which includes returns of capital.

10. • From revenue
1) Revenue, as applied to taxation, refers to all the funds or
income derived by the government, wheather from tax or any
other source while income, for tax purposes, is employed in its
“natural and obvious sense” to mean money or gain received,
coming to a person (natural or juridical) during a given period of
time.
2) Revenue is to the government while income is to a person
(natural or juridicial).

11. • Gross compensation income
 means all remuneration for services performed by an employee
for his employer, wheather paid in cash or in kind, unless
specifically excluded under the Tax Code (e.g. salaries, wages,
emoluments, honoraria, bonuses, allowances, director’s fees.)

12. Examples of compensation for services rendered: All kinds of compensation for
services rendered constitute gross income. They include:
1.
2.
3.
4.
5.
6.
Salaries, wages, and fees;
Commissions paid to salesmen;
Compensation for services on the basis of a percentage of profits;
Commissions on insurance premiums;
Tips;
Pensions or retiring allowances paid by private persons or by the
government (except pension exempt from tax); and
7. Marriage fee, baptismal offerings, sums paid for saying masses for the
dead, and other contribution received by a clergyman, evangelist, or
religious worker for services rendered.

13. Forms of compensation
Forms of compensation
Taxable amount
a) Payments made in cash
The full amount received
b) Services paid for with something
other than money (in kind)
The fair market value (FMV) of the thing
taken in payment
c) Services rendered at a stipulated
price
In the absence of evidence to the
contrary, the stipulated price shall be
presumed to be the fair market value
(FMV)

14. Examples of payments in kind
Payments in kind
Taxable amount
a) Compensation paid to an employee of
a corporation in its stock
b) Promissory note and other evidence of
indebtedness in payment of services, and
not merely as security for such payment
Fair market value of the stock at the time
received by the employee
a) Promissory note is not interest bearing
Year received – Fair discounted value
Year collected – Face value less fair
discounted value
b) Promissory note is interest bearing
Year received – Face value
Year collected – Maturity value less face
value

15. Direct dividend – is one where the paying corporation
acknowledges that the distribution is a dividend
payment.
Indirect dividend – is a distribution of profits disguised
as payment of services, properties, etc.

16. Annuity
 Is a specified income payable at stated intervals for a fixed or a
contingent period, often for the recipient’s life, in consideration
of a stipulated premium paid either in prior installment
payments or in a single payment.
 Non-taxable annuity – representing return of premium
 Taxable annuity – excess of the amount returned as premium

17. Income from whatever source
a)
b)
c)
d)
e)
f)
g)
h)
Gains arising from expropriation of property;
Gambling gains;
Income from illegal business or from embezzlement;
Damage recovery (compensation for damages);
Forgiveness of debt;
Bad debt recovery;
Tax refunds; and
Prizes and awards

18. Damage recovery
a) Recovery of lost profit is taxable.
b) Recovery of lost capital is not taxable.

19. Forgiveness of debt
1. If debtor rendered service in favor of the creditor forgiveness of
debt results in a taxable income to the debtor.
2. If the debtor did not render service in favor of the creditor
forgiveness of debt results in a taxable indirect gift.
3. If the debtor is a stockholder of a corporation forgiveness of
debt by the creditor-corporation results in dividend distribution.

20.  Bad debt recovery
1. Bad debt recovery is generally taxable.
2. Tax benefit rule: If in the year the bad debt was written
off there was a reduction of taxable income, bad debt
recovery shall constitute a taxable income.

21. Tax refunds
a) If the refunded tax is a deductible, the tax refunded is taxable.
b) If the refunded tax is not a deductible, the tax refund is not taxable.
Examples of non-deductible taxes;
1. Philippine income tax;
2. Transfer taxes (estate tax and donor’s tax);
3. Special assessment;
4. Foreign income tax claimed as tax credit;
5. Value-added tax;
6. Stock transaction tax.

22. END! 